1. Flexibility, Job Creation and Globalization: The Case of Italy James J. Heckman University of Chicago December 2002

2. Problem: High Level of Unemployment a)Rising Over Past 30 Years b)Structural 1) Weak Incentives To Invest in Human and Physical Capital 2) Impaired Ability to Respond to Changes and Opportunities Due to Bureaucratization and Regulation

3. Main Points 1)High Welfare Cost of Taxes, Regulation, Unionism 40%-100% of each Euro Security and Insurance Come at a Price 2)High Level of Distortions Cannot Explain Growing Unemployment and Sluggishness a) More variability and opportunities b) System impairs Italy’s ability to respond

4. 3)Open Markets Imply Uniformity of Prices, Equalization of the Returns to Capital 1) Rising worker mandates paid in lower wages 4)New Economy: Diverse Opportunities and Much Change 5)Many New Opportunities 6)Need to Respond and Adapt to Local Conditions 7)British Unionism vs Italian Unionism

5. Some Facts 1. OECD employment high and rising

6. 2) Unemployment Long-Term

7. 3) Concentrated Among Youth

8. 4) Structural, Not Keynesian Not a Phillips Curve Phenomenon

9. 5) Recent Decline Due to Recent Reforms

10. Italy has Lower Cross Section Inequality Than U.S. Higher Life Cycle Inequality (Flinn) Life Cycle Inequality Greater Because Mobility Is Lower

11.  Why? System Rigid

12.  Heavily Unionized

13.  High Tax Wedge

14.  High Effective Minimum

15.  Empirical Relationship Regulation and Employment

16.  Inequality and Regulation

17.  Regulation and Job Tenure

18.  Adult Males are Not Affected; Outsiders are Affected

19.  Incentives to Acquire Skills Weak Return to Education Low

20.  Levels of Educational Attainment Low; Incentives for Excellence Low;Many Italians Leave

21.  Restrictions In Other Markets Make Labor Markets Less Flexible Product Market Regulation Strong

22.  Goes Hand in Glove With Labor Market Regulation

23.  Costs of Doing Business Great

24.  Barriers to Entrepreneurship High

25.  Barriers to New Technology

27.  Impairs R&D, High Tech Investment

28.  Long-Term Consequences Less Foreign Direct Investment (see Figures 19 & 20)

30.  Less Venture Capital (see Figure 21 & 22)

32.  Technology Intensity Weak

36.  Growth in Costs